North Dakota Supreme Court hears arguments on oil royalty case

The Department of Trust Lands says it believes it's been cheated tens of millions of dollars in royalty payments from natural gas producers. But those gas companies say they believe they've interpreted the lease agreement with the state properly.

Most of the money North Dakota alleges was underpaid would go to a trust fund used for K-12 per student payments. Now it's up to the five justices on the state supreme court to make a decision.

An hour-long session of legal speak, cases citations and questioning give the justices one key question to answer: when does the sale natural gas occur when calculating royalty payments?

"When this comes down, the difference will be tens of millions of dollars for the state of North Dakota,” said Jodi Smith, land commissioner.

Here's what plaintiff's lawyers said about the process:

1. The state leases land to companies for gas production in exchange for royalty payments.

2. Newfield Exploration Company is one of those companies. They produce natural gas and sell it to a company called Oneok, who then refines the gas. Oneok takes the final product to market.

3. Using the example of Oneok being paid $100 for the end product - they spend $10 in production costs, pay $80 to Newfield and keep $10 as profit.

4. Where the dispute comes in is whether Newfield, under their lease agreement with the state, should pay royalties on the $80 they received or the $100 market price. The state says because Newfield isn't paid up front for the gas and they are involved throughout the process, the royalty should be based off of total market price.

"This portion, this section of our contract hasn't been modified since 1979 and so we haven't actually changed our stance. It's just recent years that Newfield has changed their stance, how they process the gas and how they take those deductions,” said Smith.

The justices took the case under advisement after hearing an hour of arguments. We reached out to the North Dakota Petroleum Council for a comment on the case, but they said they won't be speaking on the matter at this time.